American Campaign Academy v. Commissioner

*1054 OPINION

Petitioner seeks a declaratory judgment under section 7428(a)¹ that it is exempt from Federal income taxation under section 501(a) as an organization meeting the requirements of section 501(c)(3). Further, should we declare petitioner to satisfy the requirements of section 501(c)(3), we are requested to also determine whether petitioner is classified as "other than a private foundation" by reason of sections 509(a)(1) and 170(b)(1)(A)(ii). Based upon our holding that petitioner is nonexempt under section 501(c)(3), we do not reach the latter issue.

Pursuant to Rule 122, the case was submitted for decision with the stipulated *71 administrative record, as defined in Rule *1055 210(b)(11). For purposes of this proceeding, we accept the facts and representations contained in the administrative record as true and incorporate them herein by this reference. Petitioner has exhausted its administrative remedies within the Internal Revenue Service as required by section 7428(b)(2) and Rule 210(c)(4), received a final adverse ruling mailed on December 15, 1987, and invoked the jurisdiction of this Court by petition filed March 11, 1988.

FACTUAL BACKGROUND

Petitioner, American Campaign Academy (also referred to hereinafter as petitioner or the academy), is a Virginia corporation incorporated by Jan W. Baran, General Counsel of the National Republican Congressional Committee, on January 24, 1986, exclusively for charitable and educational purposes, including:

A. Organizing and operating a school to train individuals for careers as campaign managers, communications directors, finance directors or other political campaign professionals;

B. Sponsoring research and publishing instructional materials, reports, newsletters, pamphlets or books relating to the conduct of a political campaign;

C. Sponsoring research, to*72 include public opinion research or polling, concerning the public's attitude toward political issues or problems and the publishing of reports, pamphlets, books or other materials to be made available to the general public;

D. Elevating the standards of professionalism, ethics and morality that prevail in the conduct of campaigns for election to public office at the national, state and local levels.

At the time petitioner filed its petition, its principal place of business was located in Arlington, Virginia.

As its primary activity, petitioner operates a school to train individuals for careers as political campaign professionals. Petitioner's school maintains a regularly scheduled curriculum, a regular faculty, and a full-time enrolled student body at the facilities it occupies. Petitioner claims that it is the only school to exclusively offer a highly concentrated and extensive campaign training curriculum. Similar campaign management courses are offered by American University, Kent State University, Westminster College in Utah, Georgia State University, North Florida State, *1056 San Francisco State College, University of California-Davis, University of Southern California*73 and Bernard Baruch College in New York. Seminars offering campaign training are also sponsored by such groups as the Republican National Committee Campaign Management College, United States Campaign Academy, The Leadership Institute, Committee for the Survival of a Free Congress, and the Democratic National Committee. Petitioner has no connection with any of these training programs.

Prior to the organization of the academy, the National Republican Congressional Committee (NRCC), an unincorporated association comprised of Republican members of the United States House of Representatives, sponsored programs designed to train candidates and to train and subsequently place campaign professionals in Republican campaigns. A campaign professional works for a candidate. Campaign professionals typically occupy such strategic campaign positions as communications director, finance director, or campaign manager.

The academy stated on its Application for Recognition of Exemption (Form 1023) that it was an "outgrowth" of the course of instruction run by the NRCC. NRCC contributed physical assets such as furniture and computer hardware to the academy. Two of the academy's six full-time faculty*74 were previously involved in the NRCC's training program. One of the academy's three initial directors, Joseph Gaylord, is the Executive Director of the NRCC. Another initial director, John C. McDonald, is a member of the Republican National Committee.

NRCC continues to offer training for Republican candidates and staff members of incumbent Republican congressmen. The administrative record does not reveal to what extent, if any, NRCC continues to offer training to campaign professionals.

The academy program for training campaign professionals differs from its predecessor NRCC program. Significantly, unlike the NRCC, the academy limits its students to "campaign professionals." The academy does not train candidates nor participate in, nor intervene in, any political campaign on behalf of any candidate. Neither does the academy engage in any activities tending to influence *1057 legislation. Moreover, while the academy actively refers resumes and provides recommendations of graduates to requesting campaigns, it assumes no formal placement responsibilities. Nonetheless, in June 1986, after the first 1986 primary elections were completed, the academy included in its newsletter*75 (see discussion infra) the following invitation to all graduates:

LOST YOUR PRIMARY?

Hate your candidate? Can't deal with the weather? The primary's over, you lost. NEED A NEW JOB??

Having troubles finding that new job because someone's unfairly trashing your work? Nobody's listening to your side of the story? NEED HELP?

Call your friends at the ACA.

Just because we don't send you checks on Fridays doesn't mean we don't still stand ready to try to help you out of those sticky professional wickets.

Think about it -- it's in our best interest that you do well. The success of the Academy can only be based on the contributions of our students. Our futures are inextricably linked.

* * * *

Thanks to you all and the good work you're doing out there on the battlefields of democracy, the world is pretty aware that the Academy exists. More than that, that same world does call us looking for good folks to fill their urgent campaign needs.

If the need arises, call us up, send us a current resume, we'll see what we can do about getting you off the streets.

At least 15 graduates secured new campaign positions with Congressional and Senatorial candidates following publication of*76 petitioner's invitation.

No training materials developed by the NRCC are used by the academy. Rather, the academy has generally hired its own faculty, developed its own courses, and enhanced the training curriculum. The academy's faculty consists of 5-6 full-time members and approximately 141 adjunct members. Training materials used by students include compilations and handouts, published textbooks, trade books and articles, and faculty-prepared lecture materials.

The academy has more applicants for admission than its physical facilities can accommodate. Thus, its admissions criteria are competitive. The academy seeks to admit applicants who have a strong commitment to professional *1058 campaign involvement on the Congressional level. The academy believes committed applicants will possess at least four of the following qualifications:

1. Paid campaign experience. Applicant should have worked on a political campaign as a campaign staff member with considerable responsibility on the local, state or federal level.

2. Volunteer campaign experience. Applicant should have volunteered time to a campaign to assist the efforts of the campaign.

3. Journalism/Public relations*77 background. Applicant should have either a journalism background or practical experience working for a newspaper, radio or television station, advertising agency or political consulting firm.

4. College graduate.

5. Political experience. Applicant should have worked in a congressional office, state office, trade association, state or national political committee.

6. Civic responsibility. Applicant should have actively served in a civic/volunteer organization or campus political organization.

7. Fundraising experience. Applicant should have worked in a fundraising campaign (for an organization, school, political campaign, etc.), preferably in a management or direct solicitation role.

8. Organizational experience. Applicant should have played a principle role in the production of a program, event, organization, etc., which required coordinating people and resources in a defined time frame.

Each applicant provides the academy with the details of his or her qualifications in each applicable category. In addition, applicants are asked to provide at least two political and two professional references. And while applicants are not required to formally declare their*78 political affiliation to attend the academy, such affiliations may often be deduced from the campaign experiences and political references contained in the application. Applicants may freely volunteer their political party affiliation. The academy maintains no records indicating the number of applicants who are Republicans, Democrats, associated with other parties, or independent.

Completed applications for admission to the academy are evaluated by an admissions panel. The academy has no requirement that a member of the admissions panel be affiliated with any particular political party. However, the academy believes that a substantial number of the members of its admissions panel are affiliated with the Republican party. The academy does not discriminate on the basis of race, color, national, or ethnic origin in admitting students, *1059 in administering its educational policies and school-sponsored programs, or in granting financial assistance.

The academy's curriculum presents a considerable body of knowledge to be learned and skills to be mastered in preparing the student to perform effectively as a campaign professional. Initially, the curriculum offered by the academy*79 was divided into two parts. In part one of the curriculum, each student enrolled in an intensive overview course, lasting several weeks, designed to highlight the major elements of a political campaign. In part two of the curriculum, each student would enroll in one of three training programs providing specialized instruction in campaign management, campaign finance, or campaign communications.

Based upon feedback from its earliest graduating class, the academy determined that a single unified curriculum, rather than a two-part specialized approach, would best prepare students to meet the challenges faced by campaign professionals. The academy presently offers a single 10-week general program to all students. Current courses of instruction explore such topics as campaign strategy, the American political system and its environment, research techniques, organization basics, campaign strategy, professional ethics, Federal Election Commission rules and regulations, campaign financing techniques, voter surveying, vote targeting, issue development, media communications, speechwriting, volunteer recruiting and organizing, budgeting, coalition building and basic computer applications. *80 Discussions concerning "How some Republicans have won Black votes," "NRCC/RNC/NRSC/State Party naughtiness," and "Use of GOP allies" are included in the campaign strategy and organizational courses.

Students are expected to master the campaign fundamentals taught in the curriculum. Mastery of coursework requires students to attend daily classes from 9:00 a.m. to 5:30 p.m., and to complete demanding case studies, role-playing assignments, research projects and various homework exercises. Periodic evaluations are given to measure each student's performance. Students who fail to adequately perform may be dismissed from the program. To encourage students to concentrate their efforts on mastering the *1060 presented materials, students are prohibited from holding full- or part-time jobs during their 10-week enrollment. Students admitted to the academy are not charged tuition and receive a nominal weekly stipend during their course of study.

Following graduation, academy students are expected to apply their newly acquired knowledge and skills in a political campaign. If a graduate fails to put forth a good faith effort to secure a position in a campaign, the academy may withhold*81 its recommendation. Approximately 80 percent of the academy's graduates served on political campaigns during 1986.

Beginning June 6, 1986, the academy began publishing a monthly newsletter entitled "A Hundred Battles." The first newsletter announced that on May 16, 1986, the last students for the 1986 campaign year were graduated, bringing the total graduates to 120. During the months of June through September 1986, the newsletter tracked the activities of 119 of the academy's 120 graduates. As reported in the four newsletters, 85 graduates participated in the campaigns of Congressional or Senatorial candidates, four graduates were employed by the NRCC or Republican National Committee Field Divisions, 10 graduates participated in gubernatorial or other State-wide or local campaigns, at least three graduates were employed by various State Republican parties, and several graduates worked as political consultants. Many graduates whose candidates were defeated in the 1986 primary elections joined the campaigns of other candidates. In total, academy graduates filled important positions in approximately 98 Congressional and Senatorial campaign positions during the 1986 election cycle. *82 In addition, one graduate worked in a presidential campaign in a foreign country.

On September 16, 1986, respondent requested petitioner to provide additional information regarding several matters. One matter concerned the affiliation of the candidates served by petitioner's graduates. Specifically, respondent asked:

Of the individuals that have already graduated from your programs, how many (to the best of your knowledge) are currently working for *1061 Republican candidates? How many are working for Democratic candidates? Other parties?

On October 3, 1986, petitioner answered respondent's inquiry as follows:

We do not require students to remain in contact with the Academy following graduation. Of those who chose to do so, some have informed the Academy of the identity of the candidate(s) for whom they are working. (See the [attached] newsletters * * *.) To the best that can be determined, the predominant party affiliation of the candidates for whom Academy graduates are working in 1986 is Republican, but the Academy has no exact numbers.

Following the 1986 Federal election, approximately 46 percent of the academy's graduates were either unemployed or employed in *83 nonpolitical positions.

Funding for the academy's activities has been exclusively provided by the National Republican Congressional Trust (NRCT), an organization that collects political contributions and uses such funds for purposes approved by the Federal Election Commission. No funding has been received from any candidate's campaign committee. NRCT funding through August 1987, reached $ 972,000. The academy has estimated that 90 percent of its funding is expended to run its school. The remaining 10 percent of funding has been dedicated to research and the publishing of reports, pamphlets, books, or other materials to be made available to the general public.

DISCUSSION

Section 501(a)² exempts organizations described in section 501(c) from Federal income tax. In order to qualify for *1062 an exemption under section 501(c)(3), an organization must satisfy four criteria: (1) It must be organized and operated exclusively for certain specified exempt purposes, including educational purposes; (2) no part of its net earnings may inure to the benefit of a private shareholder or individual; (3) no part of its activities may constitute intervention or participation in any political*84 campaign on behalf of any candidate for public office; and (4) no substantial part of its activities may consist of political or lobbying activities. Sec. 501(c)(3). These requirements are stated in the conjunctive. Petitioner's failure to satisfy any of the four requirements is fatal to its qualification under section 501(c)(3). Levy Family Tribe Foundation v. Commissioner, 69 T.C. 615, 618 (1978). In addition to satisfying each condition specified in section 501(c)(3), petitioner must also establish that its purpose is not contrary to public policy. Bob Jones University v. United States, 461 U.S. 574, 591-593 (1983).

*85 The responsibility for ruling on the section 501(c)(3) exempt status of an organization lies with respondent, who, based upon the uninvestigated statements of fact submitted by the taxpayer, must determine whether each of the prescribed requirements is met. Houston Lawyer Referral Service, Inc. v. Commissioner, 69 T.C. 570, 573 (1978). Respondent discharges his responsibility pursuant to highly detailed administrative procedures. See Statement of Procedural Rules (SPR hereinafter), 26 C.F.R. sec. 601.201(n) (1988); sec. 1.508-1, Income Tax Regs. If in respondent's judgment the organization fails to qualify for exempt status, the reasons for disqualification are normally (and were in the case at bar) articulated in a notice of final determination issued to the organization. The organization which has properly exhausted its administrative remedies may thereafter timely petition for judicial review of respondent's denial by this Court, the U.S. Claims Court, or the U.S. District Court for the District of Columbia. Sec. 7428 and SPR, 26 C.F.R. sec. 601.201(n)(5)-(7).

A timely petition made under section 7428(a) confers jurisdiction on this Court to*86 declare whether the petitioning *1063 organization initially qualifies or continues to qualify under section 501(c)(3) as an exempt section 501(a) entity. In making our declaration, we do not, however, engage in a de novo review of the administrative record. Houston Lawyer Referral Service, Inc. v. Commissioner, 69 T.C. at 577. Rather, we "base [our] determination upon the reasons provided by the Internal Revenue Service in its notice to the party making the request for a determination, or based upon any new argument which the Service may wish to introduce at the time of the trial." See H. Rept. 94-658, at 285 (1976), 1976-3 C.B. (Vol. 2) 977. Thus, the scope of our inquiry and declaration is limited to the propriety of the reasons given by respondent for denying petitioner's application for exempt status. Aid to Artisans, Inc. v. Commissioner, 71 T.C. 202, 208 (1978).

Respondent concedes that (1) petitioner is organized exclusively for exempt purposes, i.e., educational purposes, (2) no part of petitioner's net earnings inure to the benefit of a private shareholder or individual, (3) *87 no substantial part of petitioner's activities consists of political or lobbying activities, and (4) petitioner is not involved in any proscribed campaign activities. Likewise, respondent makes no contention that the activities of the academy are contrary to established public policy. Rather, respondent rests his denial of the academy's application for exempt status solely on the academy's alleged failure to operate exclusively for exempt purposes. Specifically, respondent's final ruling letter states:

You have failed to establish that you are operated exclusively for exempt purposes as required by section 501(c)(3). You are operated for a substantial non-exempt private purpose. You benefit Republican Party entities and candidates more than incidentally. Also, your activities serve the private interests of Republican Party entities rather than public interests exclusively.

Respondent does not assert at this proceeding any additional bases for denying petitioner's application.

We note at the outset that petitioner bears the burden of overcoming the grounds set forth in respondent's final ruling letter. Rule 217(c)(2)(i). To prevail herein, petitioner must show, based upon*88 the materials in the administrative record, that it does not operate to benefit Republican Party *1064 entities and candidates more than incidentally or that such benefits do not serve a private rather than a public interest. See Hancock Academy of Savannah, Inc. v. Commissioner, 69 T.C. 488, 492 (1977); B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352, 356 (1978); sec. 1.501(c)(3)-1(c), Income Tax Regs.

The operational test of section 1.501(c)(3)-1(c)(1), Income Tax Regs., is designed to insure that the organization's resources and activities are devoted to furthering exempt purposes. The operational test examines the actual purpose for the organization's activities and not the nature of the activities or the organization's statement of purpose. Kentucky Bar Foundation v. Commissioner, 78 T.C. 921, 923-924 (1982). In testing compliance with the operational test, we look beyond the four corners of the organization's charter to discover "the actual objects motivating the organization and the subsequent conduct of the organization." Taxation with Representation v. United States, 585 F.2d 1219, 1222 (4th Cir. 1978),*89 citing Samuel Friedland Foundation v. United States, 144 F. Supp. 74, 85 (D.N.J. 1956); Christian Manner International v. Commissioner, 71 T.C. 661, 668 (1979). What an organization's purposes are and what purposes its activities support are questions of fact. Christian Manner International v. Commissioner, 71 T.C. at 668. We may draw factual inferences from the administrative record in the performance of our review function. Nat. Assn. of American Churches v. Commissioner, 82 T.C. 18, 20 (1984).

The Treasury Regulations specify three conditions which must be satisfied for an organization to meet the operational test. Church By Mail, Inc. v. Commissioner, 765 F.2d 1387, 1391 (9th Cir. 1985), affg. T.C. Memo. 1984-349. First, the organization must be primarily engaged in activities which accomplish one or more of the exempt purposes specified in section 501(c)(3). Sec. 1.501(c)(3)-1(c)(1), Income Tax Regs. Second, the organization's net earnings must not be distributed in whole or in part to the*90 benefit of private shareholders or individuals. Sec. 1.501(c)(3)-1(c)(2), Income Tax Regs. Third, the organization must not be an "action" *1065 organization, i.e., one which devotes a substantial part of its activities attempting to influence legislation, or participates or intervenes, directly or indirectly, in any political campaign. Sec. 1.501(c)(3)-1(c)(3), Income Tax Regs.

Respondent does not contend that petitioner's earnings inure to the benefit of private shareholders or individuals, or that petitioner is an action organization. Rather, respondent recognizes on brief that "Academy would * * * be described in section 501(c)(3) so long as it serves a public interest as required by section 1.501(c)(3)-1(d)(1)(ii) [Income Tax Regs.]." Thus, the sole issue for declaration is whether respondent properly determined that petitioner failed to satisfy the first condition of the operational test by not primarily engaging in activities which accomplish exempt purposes.

To establish that it operates primarily in activities which accomplish exempt purposes, petitioner must establish that no more than an insubstantial part of its activities*91 does not further an exempt purpose. Sec. 1.501(c)(3)-1(c)(1), Income Tax Regs.³ The presence of a single substantial nonexempt purpose destroys the exemption regardless of the number or importance of the exempt purposes. Better Business Bureau v. United States, 326 U.S. 279, 283 (1945); Copyright Clearance Center v. Commissioner, 79 T.C. 793, 804 (1982).

When an organization operates for the benefit of private interests such as designated individuals, the creator or his family, shareholders*92 of the organization, or persons controlled, directly or indirectly, by such private interests, the organization by definition does not operate exclusively for exempt purposes. Sec. 1.501(c)(3)-1(d)(1)(ii), Income Tax Regs.⁴ Prohibited private benefits may include an "advantage; *1066 profit; fruit; privilege; gain; [or] interest." Retired Teachers Legal Fund v. Commissioner, 78 T.C. 280, 286 (1982). Occasional economic benefits flowing to persons as an incidental consequence of an organization pursuing exempt charitable purposes will not generally constitute prohibited private benefits. Kentucky Bar Foundation v. Commissioner, 78 T.C. at 926. Thus, should petitioner be shown to benefit private interests, it will be deemed to further a nonexempt purpose under section 1.501(c)(3)-1(d)(1)(ii), Income Tax Regs. This nonexempt purpose will prevent petitioner from operating primarily for exempt purposes absent a showing that no more than an insubstantial part of its activities further the private interests or any other nonexempt purposes. Sec. 1.501(c)(3)-1(c)(1), Income Tax Regs.

*93 Respondent contends that petitioner's activities substantially benefit the private interests of Republican party entities and candidates, thereby advancing a nonexempt private purpose. Petitioner counters that respondent erred in denying its exemption application by incorrectly applying the private benefit analysis of section 1.501(c)(3)-1(d)(1)(ii), Income Tax Regs., to persons other than a "private shareholder or individual" within the meaning of section 1.501(a)-1(c), Income Ta